Initial public offerings (IPOs) are legendary for producing big gains for early investors. Stories about technology and pharma IPOs surging higher permeate the Street, enticing many investors to dip their toes into the volatile waters of a newly-listed security.
But the reality is that you don't have to be a first responder in order to score big profits on an IPO. In fact, some of the biggest gains in a new issue frequently happen after shares have already surged higher in the first days, weeks or even months following the IPO.
Take Google Inc. (Nasdaq: GOOG), which is considered one of the most successful companies and IPOs of all time, for example. Even though the IPO was priced at $85 a share, demand was so strong on the first trading day, that Google never traded below $100 as tech-thirsty investors snatched up shares hand over fist. That strong initial surge left many investors thinking the best was over. But as it turned out, that was just the beginning of an astounding growth story, with Google producing most of its gains in the next three years before topping off above $700 in late 2007. Not every company will be able to achieve the amazing success of Google, but this is a great example of the short- and long-term dynamics of a successful IPO.
Remaining patient with an IPO can also be a great strategy to avoid duds. Online gamer Zynga Inc. (Nasdaq: ZNGA) and provider of online deals Groupon Inc. (Nasdaq: GRPN) are both great examples. These two highly-hyped IPOs had investors reminiscing about the late 1990s when every tech IPO shot to the moon (think Amazon.com (Nasdaq: AMZN) and Ebay (Nasdaq: Ebay)). But as it turned out, these two stocks showed a much greater appreciation for gravity, with Groupon down 87% and Zynga down 77% on the year. Early investors in these IPOs have taken huge losses. Take a look at the big decline since their IPOs...
There is definitely opportunity for short-term gains in a hot IPO, but the biggest returns usually come from the longer run. So with these lessons in mind, here are four 2012 IPOs that still have plenty of gas in the tank and are likely to surge in the next weeks and months.
1. Carlyle Group LP (NYSE: CG)
IPO date: May 2012
Gains since IPO: 16%
The well-known private-equity firm operated for 25 years before its IPO in May. The company has managed the transition well, and is expected to earn $2.21 per share this year. Analysts are projecting full-year earnings of $3.06 per share in 2013, a bullish 38% growth projection. This means Carlyle has serious value, trading with price-to-earnings/growth (PEG) ratio of 0.59, a sharp discount to its peer group average of 0.97. Carlyle also offers an attractive 2.5% dividend yield. If Carlyle traded with the same valuation as its peers, then shares would jump 64% from current levels.
2. MRC Global Inc. (NYSE: MRC)
IPO date: April 2012
Gains since IPO: 15%
The company sells industrial goods such as pipes, valves and fitting to the energy industry. The bullish trend in energy is a huge tailwind for the company as a growing global population continues to drive demand. This trend was reflected in the company's recent third-quarter results, coming in 24% ahead of expectations. That led to some very bullish upward revisions in estimates, with the current-year earnings estimate jumping 16% to $1.85 per share. Estimates for 2013 jumped 13% to $2.38 per share, a bullish 28% growth projection. If MRC Global's forward price-to-earnings (P/E) ratio of 13 returned to its peer average of 14, then shares would climb 8%.
3. Oaktree Capital Group LLC (NYSE: OAK)
IPO date: April 2012
Gains since IPO: -4%
This investment management company has a 5% dividend yield that is an immediate point of interest for income investors. But this stock has more strength than just a hefty dividend. Analysts are calling for earnings of $4.83 per share in 2013, a bullish 38% growth projection that makes this another undervalued IPO from 2012. If Oaktree traded with the same peer group PEG ratio of 1.02 instead of its current 0.79 PEG ratio, then shares would jump to more than $50, a 25% increase from current levels.
4. PetroLogistics LP (NYSE: PDH)
IPO date: May 2012
Gains since IPO: -35%
PetroLogistics sells specialty chemicals such as propylene and hydrogen to petrochemical and chemical companies. This yield hog carries an outsized 7% dividend yield, making this another solid pick for investors looking for income. The company has had a tough year, with shares down 33% in 2012, but this just means there's a great value opportunity here. If shares traded in line with their peer group's average forward (P/E) ratio of 13 instead of its current P/E of 11, then Petrologistics would climb 15%.
Risks to Consider: Fresh IPOs have a history of volatility due to less predictable earnings and cash flows. While this creates an opportunity for more upside, IPOs should be a satellite holding in a balanced equity portfolio because of their higher-risk profile.
Action to Take --> You don't have to buy an IPO in its first days or weeks in order to score big gains. In fact, if you wait a little longer and research IPOs with strong earnings and compelling value, then you'll be in position to score bigger gains. The four IPOs mentioned above could do just that in 2013.